Insurers prefer no change on annuities

By Nina Montagu-Smith

12:01AM BST 17 Oct 2002

The Association of British Insurers (ABI) yesterday backed the Government's determination to maintain a requirement to buy annuities in retirement, suggesting it would not favour changes to the current regime.

Joanne Segars, head of pensions at the ABI, said: "For the vast majority of people, an annuity is the best way to maximise both income and security in retirement."

The ABI was announcing its recommendations for annuities in anticipation of the Government's forthcoming Green Paper, "Modernising Annuities".

Although annuity rates have fallen as a result of lower interest rates and investment returns and increased longevity, the Government has made it plain that it does not intend to change the rules.

Currently people with a personal pension must spent at least three-quarters of their funds on an annuity before the age of 75.

Many changes to this rule have been suggested, but the Government, now backed by the ABI, has rejected most. Julie Stark, author of the ABI's report, dismissed a proposal to put back the age of 75 to give people longer before being forced to annuitise.

She said: "Most annuitants buy well before age 75, therefore increasing the age limit would not benefit many people." She added that 62pc do not delay buying an annuity at all.

The major recommendation from the ABI was to introduce a "money-back guarantee" which would enable families to reclaim money not already paid by the annuity provider in income if the annuitant died soon after buying the annuity.

Ms Stark said this would make annuities more attractive and encourage more people to save into pensions, thus addressing the problem of the £27 billion savings gap.

She said that the average pension fund used to buy an annuity was just £25,000, and 43pc of all funds are worth less than £10,000.

The ABI also suggested allowing people to take the tax-free lump sum from the pension funds after age 50 without having to buy an annuity with the rest of the fund straight away.

Danny Cox, pensions specialist from financial adviser Hargreaves Lansdown, said the ABI's suggestions showed that the industry was looking after its own interests.

He said the money-back guarantee annuity was not significantly different to options already available, but might clarify for people that there is more flexibility than is currently perceived.

Mr Cox added: "The money back guarantee doesn't help anybody buying an annuity with a small fund today, but it might help people deciding whether to save now."